Competition Pricing

Pricing a product in competition can be more difficult than pricing one isolated by its uniqueness. In the absence of direct competition, one can estimate how a price change will affect sales simply by analyzing buyers’ price sensitivity. When, however, a product is just one among many, competitors can wreak havoc with such sales estimates by changing their own prices. In doing so, competitors change buyers’ alternatives to purchasing one’s product and thus manipulate what they are willing to pay for it. For example, a company might reasonably estimate that it could double sales by pricing 20 percent below the competition. But a 20 percent price cut would not necessarily generate such a result. Competitors may not allow a 20 percent price cut to become a 20 percent price differential. They may respond with price cuts of their own to narrow…